Bài đọc 6-2. Những thách thức của tăng trưởng Trung Quốc

If growth rates of this magnitude continue for another two decades to 2025, China will reach the level of per capita income of a South Korea today, but the overall size of the economy wi[r]

The Challenges

of China’s Growth

The Henry Wendt Lecture is delivered annually at the AmericanEnterprise Institute by a scholar who has made major contributions

to our understanding of the modern phenomenon of globalizationand its consequences for social welfare, government policy, and the expansion of liberal political institutions The lecture series is part of AEI’s Wendt Program in Global Political Economy, estab-lished through the generosity of the SmithKline Beecham pharma-ceutical company (now GlaxoSmithKline) and Mr Henry Wendt, former chairman and chief executive officer of SmithKline Beechamand trustee emeritus of AEI

Angus Maddison, 2001

Deepak Lal, 2002

The Challenges

of China’s Growth

Dwight H Perkins

The AEI Press

Publisher for the American Enterprise Institute

WASHINGTON, D.C.

Blue Ridge Summit, PA 17214 To order call toll free 1-800-462-6420 or 1-717-794-3800 For all other inquiries please contact the AEI Press, 1150Seventeenth Street, N.W., Washington, D.C 20036 or call 1-800-862-5801.

Library of Congress Cataloging-in-Publication Data

Perkins, Dwight H (Dwight Heald),

1934-The challenges of China’s growth / by Dwight H Perkins

p cm

Includes bibliographical references

ISBN-13: 978-0-8447-7195-3 (pbk : alk paper)

Printed in the United States of America

The Past Twenty-Seven Years 3

Forecasting China’s Future Economic Growth 10 Sources of Political Tension 26

The Impact of Future Economic Growth 33

Implications for United States Policy 41

It is now an aggregate economic force to be reckoned with on theworld stage in 2006 If growth rates of this magnitude continue foranother two decades to 2025, China will reach the level of per capitaincome of a South Korea today, but the overall size of the economywill be twenty-five times that of South Korea today and roughlyequivalent to, or slightly larger than, the size of the U.S economy in

2005 Abject poverty, using either the standard of $1 per day or

$2 per day, will have been eliminated from this 20 percent of theworld’s population—a population that is twice the size of Europe andNorth America combined Rising incomes have made China a majormarket for exporters of both natural resource products and high technology manufactures For exporters of labor-intensive and somehigher-end manufactures, however, China has become a formidablecompetitor On the negative side, another economy the size of that ofthe United States’ that, like the United States uses energy wastefully,will put a large strain on the world’s environment At the moment,China, in terms of energy use per unit of GDP, is even more wasteful

than the United States But China also is making vigorous efforts atpresent to raise the efficiency of its energy use Where China will be

in this regard two decades from now remains to be seen, but there islittle doubt that China will be a major emitter of greenhouse gasesand other pollutants by that time China is also rapidly building upits military capacity, and that buildup is likely to continue as long asthe economy keeps growing rapidly But will this high growth rate ofGDP continue and for how long?

Economies that grow rapidly for a time do not always continuealong that path until they reach high income status Argentina is the economy most often cited to illustrate this point Argentina, in

1910, had a per capita income higher than that of Germany orFrance, but then growth slowed From 1948 to 1959 and from

1974 through 1994 there was no growth whatsoever in Argentina’sper capita income.2 The misguided industrial policies of PresidentJuan Peron and many of his successors, together with the 1980sdebt crisis, account for the long periods of economic stagnation But Argentina is one country among many Between 1913 and

1950, despite two world wars and the Great Depression, averageper capita income in eleven major West European countries didgrow at a modest 1.4 percent per year, but in Germany per capitaincome in 1949 was virtually the same as in 1913 In France, it was not until 1949 that the per capita income climbed back to thelevel achieved in 1929.3In more recent times we have the example

of the former centrally planned command economies of EasternEurope and the former Soviet Union There the transition to mar-ket economies came at the price of a deep depression for almost all

of them Ten years after the collapse of the Soviet-style economicsystem (in 1989) only Poland, the Czech Republic, Slovakia, andHungary had recovered to or slightly surpassed the per capitaincome levels of the pre-1989 period.4

Thus there are many ways in which growth can be stopped.Prolonged warfare on one’s territory is an obvious example.Misguided policies can achieve similar results A decision to abandonone economic system for another can lead to years of adjustmentbefore growth is restored Nations heavily dependent on natural

resources such as oil regularly go through cycles of boom followed

by bust But China has managed so far to avoid most of these pitfalls.China has enjoyed peaceful relations with its neighbors since at least

1980 China made the transition from a command economy to amarket economy without a recession—to the contrary, growth accel-erated immediately once the transition process began And China isnot a natural resource rich country that experiences boom and bustwhen mineral prices rise and fall But China is also a country that has not made a transition to a political system that fosters active citizen participation in the political process Can rapid economicgrowth in China continue without comparable changes in the politi-cal system? If changes in the political system are likely in the not-too-distant future, will those changes be gradual and peaceful or sudden and violent?

In the remainder of this essay, we will first review just how found the economic and social changes of the past twenty-sevenyears have been We will then turn to the question of whether theeconomic forces at work will allow this economic transformation tocontinue As the brief discussion above makes clear, however, it isnot economic forces that typically bring periods of sustained growth

pro-to a halt The question for China is whether major disruptions in thedomestic or international political arena are likely to change what ineconomic terms appears to be a very positive forecast We will endwith a few remarks about the implications of these likely trends forAmerican policy toward China

The Past Twenty-Seven Years

Before assessing the prospects for continued rapid growth in China,

it is helpful to have a clearer picture of just what has, and has not,occurred in China over the past twenty-seven years in both economicand political terms In 1974 and 1975, when I first visited the People’sRepublic of China, there was little construction going on in China’scities and construction cranes were simply not in evidence Newhousing for urban residents was also not in evidence and nationwide

even many engineers, professors, and medical doctors were squeezedinto a tiny space where typically three people lived in an area of 13.2 square meters or 140 square feet that included the sleeping andliving area5, a tiny kitchen sometimes shared, and a shared bathroom.Farmers had roughly double that amount of space, but they often had

to share it with their animals By 2004, in contrast, China was ing 479 million square meters of new urban residential space a yearfor an urban population of 543 million, and the average living spacefor an urban family of three had quintupled to 75 square meters ornearly 800 square feet.6If one looked out the window of a high-risebuilding in a city such as Shanghai, virtually every building one couldsee had been constructed within the past ten years

build-Beginning in 1959 through 1961, because of Mao Zedong’s GreatLeap Forward and Rural Peoples Commune movements, over 30 mil-lion Chinese died prematurely, largely because of the indirect effects

of inadequate levels of food This was due partly to a decline inproduction and even more so to the poor distribution of the foodsupplies that did exist Severe malnutrition came to an end with therecovery of agriculture after 1961, but rationing of grain and otherkey agricultural commodities continued through the 1970s By thefirst years of the twenty-first century, however, food rationing waslong gone and all but the poorest people in the more remote ruralareas had enough to eat The percentage of household income spent

on food in the urban areas had fallen from 57 percent in 1981 to

38 percent in 2004, and the comparable Engel coefficient for therural areas had fallen from 60 percent to 47 percent as incomes rose

In the late 1970s and early 1980s there were no mobile phonesand relatively few land line phones even in the urban areas A callfrom Beijing to Shanghai could take hours to put through.7By 2004there were 111 mobile phones per 100 households in urban Chinaand there were 54.5 phones of all kinds per 100 households in therural areas although there was considerable variation from oneprovince to another In 1981 hardly anyone in the rural areas had atelevision set (0.16 sets per 100 families), but by 2004 the greatmajority of rural residents had a television set and two-thirds of thosesets were color

Rural Chinese in 2004 still mainly rode bicycles, but one-thirdhad motor bikes or used their hand tractors as mini-trucks (therewere 19 mini-tractors per 100 households) In the cities passengercars in the 1970s were reserved for high-level cadres and for impor-tant visitors Production of motor vehicles other than trucks in 1981was less than 70,000 per year, mainly of vehicles based on a Sovietdesign that was itself patterned on a U.S design of the 1930s In thefirst half of 2006, in contrast, passenger automobile production had reached 1.8 million vehicles, with Buick edging out Volkswagenfor the top spot in terms of sales In urban China in 2004, however,there were still only 2 automobiles per 100 households, a figuresimilar to that of Japan in the early 1960s.8

Even a small percentage of automobiles per capita in a countrywith a population of 1.3 billion, however, can create major trafficjams Beijing has built one ring road after another and barely keeps

up with the need Nationwide in the 1970s, the main trunk ways linking major cities were typically two-lane paved roads, andtruck traffic could be almost bumper to bumper for hundreds ofmiles on key roads Feeder roads onto these main roads more oftenthan not were unpaved Beginning in the 1990s, however, Beijingdecided it needed a modern countrywide highway system, and inthe decade that followed, the nation constructed a multi-lane limitedaccess highway system throughout the nation comparable to theAmerican interstate system (although not quite as long as the latterbecause the main roads of the northwest and Tibet were still mostlytwo-lane and not particularly crowded with traffic).9

high-In the 1970s China’s one airline used mainly old Soviet planes;purchase of its first ten Boeing 707s was a major event By 2004China had purchased 675 large and medium commercial aircraftfrom Boeing and Airbus, and its purchase of some smaller passen-ger planes was approaching 100 a year Lufthansa, by way of com-parison in 2006, had a fleet size (including subsidiary airlines) of

429 aircraft with 52 more on order.10American Airlines, the largestairline in the world, had 707 planes in 2005.11 Virtually everyprovincial capital had a new modern airport with state-of-the-art navigation equipment In 1979, by contrast, even a major city

such as Wuhan had an airport that closed down, often for days,when there was a light rain.12

Most Chinese shared at least to some degree in this increasedprosperity, but there are exceptions, mainly in the rural areas In

1980 the average expenditure per capita in the rural areas (in 2004prices) was just under 600 yuan and net income was 7 percenthigher.13In 2004 net income (also in 2004 prices) was 2,936 yuan.Only 2.4 percent of rural households in 2004 had a per capita netincome of 600 yuan or less Another 10.1 percent had a householdper capita income of less than 1,200 yuan From personal observa-tions made in designated poor counties in China’s two poorestprovinces (Gansu and Guizhou provinces in 1999), the poorest

families in those villages were very poor indeed Some slept under

a thatched roof on slats a few feet above their privately owned hogthat in turn resided next to the very crude kitchen The children inthese families were poorly clothed and barefoot and, despite com-pulsory education through eight grades, one saw young girls whowere clearly not in school But even in these designated povertycounties, however, the roads into them are often paved and many,and possibly most, have electricity If they have a family memberworking in the factories on the coast, the children are well dressedand are clearly still in school Their homes have tile roofs

Converting these figures into U.S dollars in order to compareChina with the commonly used measures of poverty of $1 and

$2 per day introduces some subjectivity, mainly because China hasnever officially calculated its GDP in purchasing power parity (PPP)dollars According to World Bank estimates, the PPP exchange ratebetween the Chinese yuan and the U.S dollar is 4.8 times the offi-cial dollar to yuan exchange rate.14 Using the PPP exchange rate,therefore, the average net income of Chinese farmers in 1980 was

$360, meaning that the average farmer just made the $1 per daypoverty level In 2004 the average PPP net income was $1,762 orwell above the higher $2 per day poverty line In 1980, over half ofthe rural population was below the $1 poverty line and much

of the rest were below the $2 per day poverty line According toChen and Ravallion, the number of people in the entire Chinese

population below the $1 per day poverty line in 2001 had fallen

to 16.6 percent of the total population and the number below the $2 line in 2001 was 46.7 percent.15By 2005 these percentageswould have fallen further Whatever the validity of these precisenumbers, there is no question that poverty in China has fallen dra-matically over the past quarter century

Economic progress in China over the past twenty-seven years,therefore, has been impressive But the changes in China go wellbeyond income and infrastructure China is less and less a nation ofpeasants, for example The officially registered urban population hasrisen from 17.9 percent of the total to 41.8 percent Total employ-ment in the primary sector (which is mostly agriculture) fell from70.5 percent in 1978 to 46.9 percent.16Along with this shift out ofagriculture have come a number of changes, not all of which havehad a positive impact on welfare The rural health system built upunder the communes has fallen apart under free markets, and fewrural people have any health insurance Moving to the cities does nothelp, because few migrants from the rural areas can afford the cost

of urban health care The household registration system also makes

it difficult for rural migrants to put their children in urban schools

We shall explore these problems at greater length below

Perhaps least appreciated by the world outside of China are themajor changes that have already taken place in the political sphereand in the populations’ access to information While Mao Zedongwas still alive and his wife Jiang Qing dominated the culture world,even the Chinese elite had very limited access to information aboutwhat was happening in the outside world or to what was happening

in China itself The main publication available to a narrow elite was

cankao xiaoxi (reference news) that had clippings from the Western

press among other sources The open press did little more than lish official decrees of the government and reports on important vis-itors from abroad Even popular entertainment, such as Beijingoperas, was limited by the cultural czars to a handful of perform-ances that gave the “correct” political message People were afraid

pub-to talk frankly about issues with their neighbors and even closefriends for fear that they would then be dragged in front of a meeting

to confess and self-criticize their behavior—or worse Suicide notuncommonly followed on the worst of these confrontations.Contact with foreigners was even more dangerous Simply having

a relative living abroad could be grounds for persecution Chinesespeaking to foreigners made sure that the contact was officially sanc-tioned and that they were always together with another Chinese whocould testify to what they had said to the foreigner One member ofwhat was then called the U.S Liaison Office in Beijing found hecould only talk to individual Chinese without these strictures if hehappened to be riding alongside them on his bicycle and theChinese citizen involved knew he could always veer off quickly and

be gone if he saw he was being observed by someone who mightreport him When contact with foreigners was authorized, the con-versations seldom veered from officially sanctioned positions on allissues except at the very highest levels At banquets, the one safetopic was the food.17By any reasonable standard, China prior to

1976 was a totalitarian state in the full sense of that term Using theFriedrich-Brzezinksi definition of totalitarianism China was a totali-tarian nation par excellence In particular, China during the firstthree decades of Communist Party rule was a state that had anofficial all-encompassing ideology to which “general adherence wasdemanded.” The Chinese people were not allowed to passivelyadhere to this ideology; they had to actively support it in numerous

study (xuexi) meetings and more public forums The demand for

adherence was backed up not only by police terror but also by a vasive community mutual surveillance system.18

per-Fast forward to the twenty-first century and the situation couldnot be more different Millions of Chinese have traveled abroad singlyand in groups Hundreds of thousands have studied at, or been vis-iting scholars to, universities in North America, Europe, and Japan.One-on-one conversations between Chinese and foreigners are com-mon and most of the time no one representing the security appara-tus is trying to listen in (although there are, of course, exceptions).The foreign press is subjected to considerable surveillance by theauthorities, but most other foreigners are ignored unless they areinvolved in particularly sensitive issues

The number of Chinese with access to the Internet has passed

100 million and is increasing rapidly Some sites on the Internet areblocked, but the vast majority are not And even for the blocked sites,there is reason to believe that those who want to get through to thebanned sites often can do so.19Western books, magazines, and news-papers are available to most who have the money to pay for them,although there is still censorship There are dozens of televisionchannels available showing thousands of movies, documentaries,news, and a wide variety of entertainment Whatever one thinks ofthe quality of what is shown on television, there is a great deal of it The main area where there has been very limited change is in the nature of the political system that governs China The ChineseCommunist Party has a complete monopoly on all major govern-ment positions and policy decisions The top leadership of the party

is formally selected by the party Central Committee but in practice

it is picked by a small group of Politburo members There are morecandidates for membership on the Central Committee than there are positions, so disfavored candidates can be, and are, kept off theCommittee, but the number so affected is very small The party hasalso broadened the criteria for those allowed to be party members toinclude private business people In effect the Chinese CommunistParty has abandoned its belief in maintaining a government monop-oly over the economy, a central tenet of the ideology with which itgoverned China until very recently

Elections involving the population at large exist mainly at thevillage level At that level there is often real competition for slots

to lead the locality, and officials who are incompetent or worse are often defeated China’s experiment with village democracy, how-ever, at present appears to be mainly directed at curbing local cadre abuses and is not necessarily a model that will be graduallyexpanded to include higher level political units and the cities.Corruption among officials in China is widespread The Trans-parency International Index places China tied for No 78 out of a total

of 159 countries ranked with a raw score of 3.2 (with 10 being nocorruption and 1 being completely corrupt) The Chinese-majoritysocieties of Singapore and Hong Kong by comparison were ranked

Nos 5 and 15 with raw scores of 9.4 and 8.3.20 The raw index score in this index may be a better indicator than China’s rankingagainst other countries China, for example, is only 1.1 higher thancountries in the bottom 10 percent of all those rated but is 3.0 below

No 30 on the list and 6.2 below Singapore Put differently, China isgrouped with a large number of very corrupt nations even if it is near the top of the list of the very corrupt The country has a longway to go to reach a level comparable to that of countries that mostoutside observers would consider only mildly corrupt (Italy andSouth Korea at 5.0 for example)

Rather than rely on elections that could “throw the rascals out,”China has mainly attacked the problem with severe criminalpenalties—including death for the worst cases China could also easethe corruption problem by ridding itself of the myriad of licenses and permits needed to do business that have caused China to beranked 91st out of 155 ranked countries in the World Bank’s ranking

of the “ease of doing business.”21 When it comes to obtaininglicenses, for example, out of 155 countries, China ranks No 146

in terms of the number of procedures necessary, with 30 dures that take 363 days to complete, and is tied for No 148 in terms of the time required to secure them Raising China’s rank-ing in these areas—mainly by eliminating licenses and similar procedures—would do more to curtail corruption than any realisticnumber of executions

proce-Can China sustain this seeming contradiction between having

a dynamic economy and an increasingly open society on the onehand and a political system that is slow to change and is widely per-ceived as being very corrupt on the other? Before trying to answerthat question, however, we must first explore whether China’s econ-omy will continue on its high growth trajectory

Forecasting China’s Future Economic Growth

Forecasting China’s long-term growth prospects is a very differentexercise from forecasting whether China will grow rapidly next year

or will face a hard landing and a recession because of the excessivelyhigh growth rate of 2006 All kinds of external shocks and short-term policy mistakes can affect growth from year to year Since thereform period began, China’s annual GDP growth rate has fluctuatedbetween a low of 4.2 percent (in 1989 and 1990) and a high of 14.1 percent (in 1993) Forecasting the extent of growth over adecade or longer generally must take into account these short-terminfluences To forecast China’s long-term economic growth prospects,one needs to begin with an understanding of how the high long-termgrowth of the past twenty-seven years was achieved The methodol-ogy best suited to answer that question is growth accounting orsources of growth analysis mainly from the supply side.

Following Robert Solow, we use the production function:

Y = f (K,L,t)

where Y is GDP, K is the stock of capital, L is the labor force, and t

is the shift in productivity over time This equation (with certainassumptions), can be differentiated and rearranged into the follow-ing form:

gy= wkxgk+wlxgl+a

where gy is the growth rate of GDP, gk is the growth rate of thecapital stock, glis the growth rate of the employed labor force (and

in the quality of that labor force as measured by its education level),

wkand wlare the shares in national income of the income of capitaland labor respectively, and a is the rate of growth of productivity—usually referred to as total factor productivity (TFP) The growthaccounting data for China from 1952 through 2005 are presented intable 1 on the following page

The central point of this table is that the major difference betweenChina’s slow economic growth prior to 1979 and its rapid growthfrom that year onward is driven mostly by the shift from negativetotal factor productivity growth in the 1957–1978 period to stronglypositive total factor productivity averaging 3.8 percent per year from

1979 onward Formally, the growth rate of the capital stock after

1978 accounts for slightly more of the growth than productivity(43 percent versus 40.4 percent), but this is misleading The reformsthat began in late 1978 did not raise the rate of capital formation as

a share of GDP The rate of investment as a share of GDP changedlittle from the pre- to the post-1978 period Reforms that caused thejump in productivity by raising the rate of GDP growth thus alsoraised the rate of growth of capital (since the same share of invest-ment was now applied to a higher level of GDP)

High productivity growth probably also had something to dowith why the rate of investment as a share of GDP remained so highafter 1978 Before the reform period, the rate of investment wasdriven by the government’s decision to generate a high savings ratemainly through creating high monopoly profits in industry that were then taxed away from the enterprises and subsequentlyreturned in the form of state-led investment The rate of investment

TABLE1

S OURCES OF C HINA ’ S E CONOMIC G ROWTH

Shares of Contribution Growth Rate to GDP growth

Period GDP Stock Capital TFP* Capital Human K TFP*

N OTE : TFP = Total Factor Productivity.

in this earlier period was thus an administrative decision made bythe government and was not driven by the rate of return on thatinvestment After 1978, and particularly by the 1990s and duringthe first years of the twenty-first century, however, investment wasincreasingly in private profit–oriented hands and high productivityproduced high profits that led to high rates of investment.

Sustaining high GDP growth rates in China over the next twodecades, therefore, is first and foremost a question of continuing togenerate high growth in total factor productivity Forecasting pro-ductivity growth, however, is a highly subjective exercise, so we willbegin with the somewhat easier part of the story—forecasting thecontribution to GDP growth of capital formation and the growth ofthe labor force and the quality of that labor force (human capital)

In a closed economy without access to foreign capital, the rate ofinvestment is driven in part by the rate of return to that investmentbut also by the level of domestic savings that can be mobilized tofinance that investment China today is no longer a closed economy

in that sense since foreign direct investment has reached $60 lion a year in 2004 and 2005 However, as large as that figure is, it

bil-is less than 10 percent of total Chinese investment that, as of 2004,was an extraordinary 44.2 percent of GDP—which translates in U.S dollar terms into more than $700 billion at the official exchangerate Thus, the rate of investment in China still depends to an impor-tant degree on whether China’s current, very high savings rateremains high in the future

A nation’s savings rate is the product of savings decisions byseveral distinct groups—those of individual households, of thegovernment, and of industrial and commercial enterprises Futuregovernment savings is likely to be low due primarily to its largeunfunded pension liabilities, the fact that commercial banks stillrequire refinancing of an excessive number of nonperformingassets, and because the social welfare system in general, and thehealth care system in particular, will require large-scale governmentsupport If high growth continues, however, enterprise profits arelikely to remain high, and a substantial portion of those profits will be plowed back into investment At present, enterprise profits

tend to be concentrated in the energy sector, but that could changeover time.

The most important source of savings in China today, however, ishouseholds, and households save for a number of reasons Many, forexample, save in order to accumulate funds to purchase large con-sumer durables The privatization of housing has created another rea-son to save now that families must purchase their homes Expandingconsumer credit and larger and longer term mortgages could erodethese reasons for saving over time If, as argued below, China mustshift aggregate demand from a dependence on rapid export growth

to domestic consumption and investment, then an expanded sumer lending program would be a way of accomplishing this shift The major motive for saving in households around the world,however, is to prepare for retirement The model that best capturesthis effect is the life-cycle model of savings that relates the level ofhousehold savings to a country’s dependency ratio: the ratio of chil-dren and the elderly who are not in the labor force, to those who are

con-in the labor force The dependency ratio from 1990 to 2025 is sented in table 2

pre-The central point in this table is that China’s dependency ratio hasbeen low for some time and is likely to remain low for the next twodecades The reason for this low dependency ratio is due partly tothe one-child family policy that began in the 1970s All new entrants

to the labor force over the past decade and a half and over the ing decade and a half are a product of the one-child policy Only asharp increase in the birth rate during the next five years wouldchange that picture, and then only for the years 2021 to 2025, whenthose born today and in the next few years turn fifteen years of age(and even those are likely still to be in the education system longerthan is the case today)

com-China’s workforce today, in contrast, was mostly born after 1952through the early 1970s when Mao Zedong and other Chinese lead-ers thought that the bigger the Chinese population the better Thoseborn in 1952 are not yet of retirement age, even using the early retire-ment age applied to the state sector With most adults in good healthstaying actively occupied until their mid-60s, retirement of China’s

“baby boom” generation will not really begin until after 2015 In table 2, there is in fact a slight rise in the dependency ratio between

2015 and 2025, but only back to the levels of the 1990s After

2025, the picture begins to change dramatically Most of the “babyboomers” will be retired by 2035 (the youngest will be sixty-threeyears of age) and, with increasing life expectancy in China, more andmore of them will be living into their eighties and beyond The work-force, in contrast, will be made up entirely of products of the one-child policy China’s dependency ratio will soar and the householdsavings rate will no doubt fall, but that is beyond the period withwhich we are concerned in this essay For the next two decades, thesavings rate is likely to remain high and, if the investment opportu-nities are there, the investment rate will keep up with the savings rate.Capital formation in China will continue at a rapid pace

China’s labor force, however, will not continue to grow at the pastrate As those born in the 1950s begin to retire and are replaced bythe one-child policy generation, the numbers of people in the laborforce will stagnate and may even decline slightly Currently 70 per-cent22 of those of school age (aged six to twenty-one) are now inschool, and that percentage will rise, perhaps to 75 to 80 percent, asChina moves toward universal high school education and increasinguniversity enrollments The reduction in the labor force, because ofincreased time in school, will probably be offset by simultaneous

increases in the age of the older-age groups still in the workforce ticularly if the pension systems remain as weak as they are today) Interms of growth accounting, the increase in education will mean thatthe quality of the labor force is steadily rising, and this will mean thatlabor will continue to make a positive contribution to growth—but avery modest one.

(par-This analysis of the contribution of the labor force and human ital to growth, however, leaves out one important element that, in theabove calculations, shows up as total factor productivity, but is in real-ity a contribution to growth by labor In China in 2004, there werestill 352.7 million workers in the primary sector, and most were farm-ers cultivating less than 122 million hectares of arable land.23TheUnited States, in contrast, cultivates more than 110 million hectares

cap-of land with only 3 million farmers Over the next two decades, a largeshare of China’s farm workers will leave farming and move to jobs inindustry and services, with most of those jobs being in China’s cities.Based on the differential in urban and rural wages of unskilled work-ers of roughly three to one,24the migration of farm workers to thecities should approximately triple the productivity of those workers

If employment in industry and services rises by 10 million jobs a year over the coming two decades, migrants from the countryside will be the ones filling those jobs.25The result will be the migration

of 200 million farmers out of agriculture into the cities over the nexttwo decades We will explore the broader implications of this massivemigration further below

Migration from the countryside to the cities, rising education els of the workforce in general, and a continued high rate of invest-ment should keep China’s GDP growing for at least the next twodecades, but, in the absence of a high level of total factor productiv-ity (TFP) growth, China’s GDP growth will be in the 3 to 5 percentrange As the data in table 1 indicate, TFP growth during the pasttwenty-seven years of the reform period averaged 3.8 percent a year.This high TFP growth, however, was generated by a series of reformsthat corrected some of the major distortions that hurt productivitygrowth during the command economy period between 1955 and

lev-1978 In the 1979–1981 period, for example, China abolished the

rural commune system of collective farming and went back tohousehold agriculture The result was a large jump in farm outputbetween 1978 and 1984, but it was a one-shot jump Agriculturalvalue-added growth rates reverted part of the way back to the long-term trend rates of the pre-1978 period after 1984.26

The other major change in the first years of the reform period wasthe opening up of the economy to foreign trade The rapid expan-sion of exports made possible the rapid expansion of inputs of keymaterials and equipment that certainly contributed in a major way

to productivity growth and continues to do so to this day But thegap between imported and domestically produced technology is not

as great today as it was in those early years

Beginning in 1984, China also experienced an explosion inindustrial productivity when it freed up most industrial inputs to besold on the market rather than allocated by administrative means inaccordance with the central plans The main beneficiaries were thetownship and village enterprises (TVEs) that were owned or con-trolled by localities Unlike large state-owned enterprises, the TVEsresponded to market forces because that was the main way to makemoney The TVEs also faced hard budget constraints because thelocal governments lacked the resources to bail them out if they expe-rienced losses—again unlike the large state firms that could go back

to the banks for loans that they might or might not pay back Prior

to the 1984 reforms, however, TVEs had to apply to the centralplanners for administrative allocation of key inputs, an applicationprocess where they received a low priority With the reforms, theycould purchase what they needed, albeit at higher prices than theprevious state-set prices The TVE boom that ensued lasted into themid-1990s and was the main force sustaining the high rate of indus-trial growth in that period But by the late 1990s, the TVE boom hadalso lost much of its momentum

Finally, it was in the late 1990s that foreign direct investment(FDI) in China took off In 1990 and in the years immediately pre-ceding, FDI averaged between $3 and $4 billion per year, but by

1995 that figure had jumped to $37.5 billion, and in 2004 it passed

$60 billion for the first time The money itself was not so important,

since China had large alternative sources of foreign exchange(mainly export earnings that reached $149 billion in 1995, $224billion in the year 2000, and $762 billion in 2005) What did mat-ter for productivity growth were the technology, the managementexpertise, the quality control, and the access to foreign markets thataccompanied the foreign direct investment It is likely that FDIaccounts for a large share of the 3.1 percent annual TFP growth inthe first six years of the twenty-first century (see table 1) But it isalso likely that the sharp increase in FDI since the early 1990s willnot continue long into the future FDI into China appears to be lev-eling off at the current high levels, and annual realized FDI has onlyincreased on average by 3.7 percent per year since 1997 Thus, con-tinuously rising FDI is not likely to be a major source of TFP growth,although continued high levels of FDI will no doubt contribute tofuture TFP growth.

What then will support high TFP growth in the future if many ofthe past sources appear to have run out of steam? One source islikely to be the continued privatization of much of the modern sec-tor of the Chinese economy China has never had a formal privati-zation program, and, in fact, the word privatization is not used bythe government to describe what is going on in industry and serv-ices Furthermore, it is not easy to precisely estimate the size of the private sector in China, because ownership classifications keepchanging Between 1999 and 2002, for example, the state-ownedenterprise share of industrial output in firms with sales above 5 mil-lion yuan fell from 30.56 percent to 15.59 percent But most of thisdrop occurred because state-owned enterprises in large numberswere listing on the Shanghai and Shenzhen stock exchanges andwere reclassified as shareholding enterprises The share of state-owned industrial enterprises and state-controlled shareholdingenterprises also declined, but only from 48.92 percent to 40.78 per-cent.27Outside of agriculture, the one area that is largely and unam-biguously privatized is urban housing Housing that was typicallyowned by the state industrial enterprises was sold usually at bargainprices to the occupants and most new housing is being bought byindividual families

Most of the shareholding, former state-owned enterprises, ever, still operate much like they did in the recent past when theywere formally state owned The government and the CommunistParty still have the major say in selection of management, and thegovernment in fact still has majority control of the shares in most ofthese enterprises There are a few “independent” directors on theboards, but there is little evidence that these independent directorshave much influence If shareholding is to really involve more thanjust a vehicle for raising capital and is to truly transform state-ownedenterprises into modern market- and profit-oriented corporations,the government and the party will have to become minority share-holders at the most and will have to allow boards of directors elected

how-by the majority shareholders to select top management The ChineseCommunist Party has surrendered direct power over the economy

in other sensitive areas, notably in agriculture, so there is no reason

to doubt that they won’t do so in this area as well, but they had madelittle progress in this regard by 2006

The TVEs are proceeding much more rapidly toward true tization In the late 1980s and early 1990s, most were classified ascollectives since that was a politically more acceptable term and itreflected the fact that the local community, mainly through localgovernments, had a major role in the operation of these local enter-prises Local governments still have a major role in these enterprises,but management is increasingly in the hands of a private owner Inthe current climate that is friendlier to outright private ownership,TVEs apparently no longer feel a need for the kind of political pro-tection provided by being collectively owned.28

priva-Goods and services in China have been distributed mostlythrough market mechanisms since the middle to late 1990s Thedual price system set up in the mid-1980s, where goods were partlydistributed through markets and partly through government admin-istrative channels, died a natural death.29Firms with goods to sellpreferred to offer them on the market, where prices were higher, andthey used various methods to avoid use of the administrative chan-nels Firms purchasing goods knew that, if they wanted their keyinputs on time, they were more likely to get them through the mar-

ket than from the planners The government, which introduced thedual price system mainly to appease powerful state enterprises thatdid not want to pay higher prices, had little incentive to stop thesteady erosion of the quantity of goods allocated through adminis-trative channels

Markets for factors of production—labor, land, and capital—areless well developed than in the case of goods and services There is

a fairly well developed urban land market, although it is plaguedwith political influence and other distortions There is no regularmarket for rural land, however, and there are inefficiencies created

by farmers who leave their land for the city but use various methods

to hold onto their rights to the land In such cases, the land is oftenunderutilized, and incentives to invest in the land are weak In otherparts of the country, the local authorities periodically redistribute theland under their jurisdiction to reflect changes in the demographicmakeup of their localities These interventions do sometimes serveequity considerations, and so moving toward greater efficiency byletting the market handle rural land transactions may not be politi-cally acceptable Corrupt land deals in the rural areas, whether theymake more efficient use of the land or not, are a major source ofpolitical tension and violence Typically these land deals involvelocal officials pushing farmers off their land to make way for a fac-tory or other commercial use.30

The main inefficiency in the urban labor market is the differentialtreatment of officially registered urban residents versus newmigrants from the rural areas who are still registered as rural resi-dents We will discuss this issue further below Government-directedadministrative allocation of labor, the primary method of skilledlabor allocation prior to the reform period, has largely disappeared

In terms of the impact on economic growth, however, the largestnegative influence at present arises from the underdeveloped andpolitically distorted nature of China’s capital markets Like mostdeveloping countries, China’s capital markets are underdeveloped.The main financial institutions are the commercial banks, and thesebanks since early on in the reform period have lent mainly to the lessefficient state enterprises.31Because the state enterprises were used

to having their investment needs met through the governmentbudget, they often treated bank loans as virtual grants and made

no effort to pay them back The result, as is now well known, was amassive buildup of nonperforming loans in the banking system.32

China has been struggling with how to clean up the balance sheets

of the commercial banks and is doing so with some success performing assets officially have fallen from 35 percent in 199933toaround 8 percent in 2005 The true figures are widely believed to

Non-be higher than these official estimates, but there is no doubt that the share of nonperforming loans has declined, although even offi-cially it is still at a high level Equally serious from an efficiency point of view, the banks continue to direct a large portion of theirloans to the state-owned or state-controlled sector because loans tothe state sector are seen as politically safe even if they often aren’tcommercially safe The more dynamic private sector (other thanenterprises with large amounts of foreign direct investment) has dif-ficulty getting access to capital This situation is beginning to change,but slowly

The Shanghai and Shenzhen stock exchanges are similar to thebanks in that they mainly serve the capital needs of the state sector.Firms allowed to list on these exchanges are overwhelmingly state-owned enterprises or state-controlled shareholding enterprises.Other financial institutions, notably the insurance companies, arestill in the early stages of development and are not yet major players

on the Chinese capital markets Thus, China’s financial system has

a long way to go to be the kind of efficient system that can sustaineconomic growth From a forecasting point of view, that situationcan be seen as either an advantage for the future or a disadvantage

It is a disadvantage if China fails to fundamentally reform anddevelop its financial institutions, particularly the commercial banks,

up to international standards In that case, the inability of dynamicnon-state firms to access capital could be seriously hampered andChina could even end up in a situation similar to that in Japan dur-ing its fourteen years of economic stagnation (1991–2004) Japan’sstagnation was to a significant degree the result of a banking systemloaded down with nonperforming assets that was reluctant to lend

to anyone other than the government and already established firmssuch as Toyota.

The weak state of China’s financial system, however, also can beseen as an advantage for future productivity growth If China con-tinues to take forceful steps to strengthen its financial system and put

it in the service of the whole economy, not just the favored state tor, China could achieve large efficiency gains Our own estimate isthat reforms in the financial system will continue at a steady paceand will be aided by China’s commitments under the WTO to openits financial sector to full foreign participation and competition.China has done well to date with a very weak financial system Itshould do better as it gradually weeds political considerations out ofits financial decision making

sec-In a full market economy, it is not just the allocation of goods andservices or allocation of factors of production that is handledthrough decentralized decisions of the enterprises themselves Thebasic direction of industrial development, other than in the defenseindustry, is largely left to market forces Issues such as bankruptcyand mergers or acquisitions are also handled by the parties directlyinvolved—the creditors and debtors in the case of bankruptcy, andthe firms acquiring or being acquired in the case of mergers andacquisitions These transactions are subject to rules laid down by the legislature, but enforcement of those rules is left to independ-ent judges In much of East and Southeast Asia, in contrast, it is the executive branch of the government that takes the lead in these areas

The most influential model for state-led growth in Asia was thatdeveloped by the Ministry of International Trade and Industry(MITI) in Japan and altered to fit the somewhat different conditions

of South Korea, particularly during the reign of President ParkChung Hee in the 1960s and 1970s The executive branch of thegovernment did not try to comprehensively plan industrial develop-ment Instead it attempted to determine which industries would becritical to the next stage of development and then actively promotedthose industries through directed bank loans (the government eitherowned the banks outright or had enormous influence over bank

lending decisions) The executive branch also provided access to eign exchange and critical imports (in the early stages of develop-ment when foreign exchange was scarce and was tightly controlled).Implementation was actually carried out by private firms for themost part, but these were private firms willing to do the bidding ofthe government.

for-In this kind of industrial policy, if an enterprise failed because itfaithfully carried out the wishes of the government planners, thegovernment was obligated to help the firm get out of difficulty (byforgiving past loans or by lending more funds to tide the firm over,for example) If the firm failed because of its own shortcomings, thegovernment still might intervene to save the firm but might replacethe existing management If the government felt that a differentindustrial structure was appropriate, it could pressure firms to mergewith others or get out of particular lines of business in order toreduce “excessive” competition This pressure did not always havethe desired effect (MITI’s failed attempt to force consolidation in theJapanese automobile industry is one of the best known examples),but, more often than not, the private firms tried to implement whatthe government desired In South Korea after the financial crisis of1997–1998, the government used its control over the banking sys-tem (itself largely bankrupt) to force some firms into liquidation(Daewoo) and to pressure others to give up some components inorder to concentrate on what the government felt the particular firmdid best

China, more or less by default, has inherited this kind of anindustrial policy, but has tried to implement such a policy underconditions very different from those that prevailed in Japan andSouth Korea When China abandoned comprehensive central plan-ning, it did not move toward a system of laissez-faire markets pat-terned on those of, say, Hong Kong Instead, China retained anactive interest in promoting particular industries, notably automo-biles, and thus the MITI-Korean approach has had great appeal.China also had to deal with thousands of enterprises that began toexperience financial losses once prices for their products had to beadjusted to reflect competitive market forces as opposed to the prior

system of government-set monopoly prices In addition, enterprisesunder comprehensive planning were typically single factories thatwere little more than subordinate offices of giant industrial min-istries When these enterprises were made into truly independentfirms, China ended up with one of the least concentrated industrialorganizations anywhere in the world Consolidation of this frag-mented industrial organization structure was clearly desirable, buthow was this consolidation to be accomplished?

Thus, China’s government by the 1990s faced all kinds of sions about the future path of industry, and the question was what

deci-to do about it The full market approach would have been deci-to leavethese issues to be dealt with by the individual enterprises in response

to market forces But China was not in a position to do that becauseinstitutions critical to allowing markets to make these decisionsefficiently did not exist Specifically, China’s judicial system wasextremely weak and completely incapable of handling complexissues such as bankruptcies and mergers China’s courts weren’t ter-ribly effective at resolving even simpler commercial disputes Judgeswere not well trained, and they certainly were not independent ofthe executive branch of the government After decades during whichthe judicial system was neglected or abandoned (Mao at one pointabolished the legal profession), judges had limited authority andtheir decisions could be overruled—or simply ignored—and notjust by high government officials

Consequently the Chinese government had to have an activistindustrial policy, but it lacked an essential ingredient possessed bythose implementing industrial policy in Japan and South Korea InJapan and South Korea, industrial policy was carried out by tech-nocrats, and decisions were made mainly on technical grounds and not for political or for rent-seeking purposes (corruption).Corruption and politics certainly existed in these two countries butthey played a minimum role in industrial policy, at least in the earlystages of their development (the 1950s and 1960s in Japan and the1960s and 1970s in South Korea).34In China, it is hard to imagine

a major industrial policy decision that would not be influenced bypolitics and/or rent-seeking China’s ranking in the Transparency

International Index discussed above makes it clear that corruption

is pervasive in Chinese decision making Technocrats do play somerole in Chinese industrial policy decisions, but almost never dothey have the primary or final say on major issues Furthermore,China’s very size makes an activist industrial policy emanating fromBeijing difficult South Korea’s Park Chung Hee could meet with the leaders of all of the major industries and firms once a monthand could listen to their concerns and try to solve the problemsthey were having with the government It is difficult to imagineanything comparable being attempted by President Hu Jintao orPremier Wen Jiabao There were 219,000 industrial enterprisesabove a certain minimum size (in 2004), and they were scatteredacross the country.35

Again returning to the issue of forecasting China’s future tivity growth, China’s current situation with regard to industrial pol-icy can be seen in both a positive and a negative light On the negativeside, China clearly has no choice for the immediate future other than

produc-to pursue an activist industrial policy with a good deal of governmentintervention, however inefficient that intervention might be Theinstitutions needed to avoid this outcome, notably the legal and reg-ulatory system, are simply too weak to take many tasks over from theexecutive branch of the government On the positive side, if Chinadoes set out to build the necessary legal and regulatory institutionsand moves steadily away from an activist MITI-style industrial policy,the results are likely to be a big boost in productivity

Will China take this path? There is no question that China isgradually trying to strengthen its legal institutions, and more andmore people are going to the courts in an attempt to resolve dis-putes On the other hand, the Chinese government is still full, in itsupper ranks, of former planners who see an active role for them-selves and for the government While there is little doubt that Chinahas the potential to make major improvements in the supportinginstitutions of a full market economy, it is much less clear whetherthe Chinese leadership sees activist intervention in industrial policy

in a negative light If it persists with the system as it exists today,growth over the long run could suffer

Sources of Political Tension

Failure to continue to vigorously push reform of the supportinginstitutions of a full market economy, therefore, could slow eco-nomic growth significantly, but no plausible pace of economicreform is likely to bring growth to a halt or even to bring growth to

a level of less than 5 percent a year Social tensions and the politicalchanges that could result, in contrast, could have a larger impact andcould even bring growth to a halt We do not think that this no-growth scenario is likely, but the social tensions in China today arereal enough and could lead to fundamental political changes thatcould interrupt growth, at least for a time

The tensions that are getting the most coverage in the Westernpress are largely connected with misappropriation of land by corruptlocal officials These land deals gone bad appear to be a major source

of the rising number of officially reported incidents that haveinvolved some form of higher level police and government inter-vention Basically, given the weakness of the courts, local people,particularly in the rural areas, sometimes make known their com-plaints with authority by resorting to demonstrations and violence.The long-term solution to this problem is to define rural propertyrights clearly, strengthen the courts so that they can be a fair and effi-cient way of resolving property rights disputes, and strengthen localcadre elections so that more of the corrupt local officials are weededout Accomplishing these changes will be a formidable task, but atleast it is reasonably clear what needs to be done

Other sources of potential and actual social tension in China donot have such straightforward “solutions.” At the most general level,rapid economic development, wherever it occurs, eases some sources

of social and political tension and exacerbates others High rates ofgrowth, for example, are usually accompanied by rapidly risingwages and household incomes, and that usually contributes to polit-ical stability This has been the case in China Large portions of theurban population in China, in particular the younger cohorts who are best positioned to take advantage of the many new economicopportunities, are busy getting rich and don’t have the time or the